Feb. 17 (Bloomberg) -- A mortgage on a Tennessee shopping mall coming due in June may show Wall Street is ready to resume bundling real estate loans into bonds, part of a $700 billion debt market shuttered for almost two years.
Glimcher Realty Trust of Columbus, Ohio, is in talks to obtain financing from Goldman Sachs Group Inc. to retire debt on The Mall at Johnson City that may be packaged with similar obligations and sold to investors, according to a person familiar with the transaction who declined to be identified because the negotiations are private. The current loan balance is $37.2 million, data compiled by Bloomberg show.
Goldman Sachs, Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Deutsche Bank AG are approaching property owners with terms for mortgages that may get packaged into securities with other loans as relative yields decline, said people familiar with the talks. The last sale of real estate securities from multiple borrowers was in June 2008, Bloomberg data show. Last year’s sales were backed by loans from a single borrower.
Restarting the commercial mortgage-bond market is “like recovering from a very bad motorcycle accident,” said William Glazer, president of Keystone Property Group of Bala Cynwyd, Pennsylvania, which completed a recent refinancing in suburban Pittsburgh. “In rehab, people are more risk averse, because they were so badly stung in the accident.”
Mortgage-Backed Securities
Sales of commercial-mortgage backed securities plummeted to $11.15 billion in 2008 from a record $232.4 billion in 2007 as the credit market seized up, according to data compiled by Bloomberg. Even with U.S. government aid, only $3.04 billion of the bonds were sold last year, the data show.
The lack of transactions choked off funding to borrowers with maturing debt. About $28 billion in commercial mortgages packaged into bonds mature this year, according to Credit Suisse Group AG data.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged yesterday at 171 basis points, or 1.71 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. A year ago, the spread was 446 basis points.
The Markit CDX North America Investment Grade Index fell 1 basis point to a mid-price of 98 basis points yesterday, according to broker Phoenix Partners Group. In London, the Markit iTraxx Crossover Index, which is linked to the debt of 50 European companies with mostly high-yield credit ratings, declined 1 basis point to 506, according to JPMorgan Chase & Co. prices. A decrease signals improving perceptions of credit quality. A basis point, or 0.01 percentage point, equals $1,000 a year on a contract protecting $10 million of debt.
Fannie, Freddie
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates fell to the lowest relative to Treasuries in at least 25 years, before retracing the move, amid speculation the government-sponsored companies’ plans to buy delinquent loans out of their bonds will lead to reinvestment in the market. The difference between yields on Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries was unchanged at about 0.65 percentage point, after earlier falling to 0.63 percentage point, Bloomberg data show.
The Tennessee mall discussions signal that some banks are willing to hold the debt for several months until it can be packaged into bonds, even as the pace of bad loans accelerates. As bond prices recover, banks are more willing to take the risk, said Jay Haberman, an executive vice president at A10 Capital in Washington, a commercial real estate lender and investor.
Tighter loan terms and plunging property values mean banks are competing for a small pool because many borrowers went heavily into debt during the boom years and can’t obtain enough to pay off the current mortgage.
Late Payments
Commercial property prices are down 43 percent from October 2007 peaks, according to Moody’s Investors Service.
Top-rated commercial mortgage debt yields have fallen to within 3.2 percentage points of Treasuries, down from 11 percentage points a year ago, according to data compiled by Barclays Capital.
Late payments occur on about 6 percent of commercial mortgages bundled and sold as bonds, more than five times the rate a year ago, and may climb to 12 percent in 2012, according to Fitch Ratings.
Commercial property loans valued at $10 million to $40 million in smaller cities would be among the likeliest for the first issues of the securities, according to Aaron Bryson, a New York-based analyst at Barclays. “There is a large void in second- and third-tier markets,” he said.
Pennsylvania Office Park
Johnson City, Tennessee, a 60,000-population community, sits at the foot of the Appalachian Mountains, 107 miles (172 kilometers) east of Knoxville. At 565,720 square feet (52,000 square-meter), The Mall at Johnson City, built in 1971, counts among its tenants stores from J.C. Penney Co., Gymboree Corp. and Dick’s Sporting Goods Inc.
The mall produces sales of more than $400 per-square-foot, said Lisa Indest, vice president of finance at Glimcher. U.S. malls generate average sales of $373 per-square-foot, according to the New York-based International Council of Shopping Centers.
In Cranberry, Pennsylvania, a suburb of Pittsburgh, Keystone Property obtained a $41.5 million loan from Deutsche Bank for a 554,574 square-foot office park. The loan refinanced short-term debt from Bank of America used to acquire the property in September 2008, Glazer said.
The five-year, 7.25 percent senior loan has a 60 percent loan-to-value ratio, Glazer said. Deutsche Bank plans to combine it with others in a bond offering, one of the people familiar said. Keystone also took on $12 million in debt from Pembrook Capital, he said.
‘Understand Risk’
During the market peak in 2007, as many as 300 loans, some with big-city office towers, were bundled into so-called securitizations that grew as large as $7.6 billion, Bloomberg data show. The deals today would probably total about $500 million, the people familiar said.
Michael Duvally, a spokesman at Goldman Sachs, declined to comment, as did Justin Perras at JPMorgan, Kerrie McHugh at Bank of America, John Gallagher at Deutsche Bank and Gabriel Boehmer at Wells Fargo.
“It is the business of Wall Street firms to understand risk and underwrite it appropriately,” said A10’s Haberman, who ran Morgan Stanley’s mid-Atlantic commercial mortgage-backed bond business from 2005 to 2008. “They have been sitting on the sidelines for a while, so many of them feel they need to start making some loans.”
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
